Four lessons on the psychology of money | Just Reflections - Issue #21
I was talking to a friend last week about my highlights for 2021. I told him about how one of my objectives for the year was to learn about investing. I’m not a genius yet but I think I did pretty well; I learnt a tonne of things. I even threw a bit of cash that I was willing to risk at some stocks and shares, trying out all sorts of things. There were many ups and downs, but I came out of the year with a pretty good return.
Anyway, my friend asked if I could teach him the stuff I learnt. I’ve been thinking about the best way to do that and incidentally this week, I read a book that’s a fantastic starting point for anyone interested in money.
Today’s issue summarizes my favourite take aways from the first few chapters of “The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness” by award-winning financial journalist Morgan Housel. I think it brilliantly presents a lot of really important lessons about money.
Photo by Morgan Housel on Unsplash
I haven’t even finished this book but it’s already one of my favourite books about money. Content aside, it’s incredibly well written. It’s a short book. He’s not wordy, and he doesn’t go around in circles. He goes straight to the heart and makes his point succinctly. I love it! In his words;
It’s not a long book. You’re welcome. Most readers don’t finish the books they begin because most single topics don’t require 300 pages of explanation. I’d rather make 20 short points you finish than one long one you give up on. — Morgan Housel, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
According to Morgan Housel, in a Phillips and Co Presents interview, one of the really important principles in the book is that “personal finance is more personal than it is finance.” While we’re all investors, we’re all different and what works for one person will not work for everyone.
Play your own game
People play widely different games with their money and they have different goals based on their varied circumstances. Investing doesn’t have a single correct answer for everyone. What one person wants is not what everyone wants. What’s fun and fulfilling for one person is not fun and fulfilling for everyone.
Everyone is different. So what each of us needs to do is;
“Figure out what game you’re playing, then play it (and only it)”. — Morgan Housel
Many people only have a vague idea of the game they want to play. As a result, they’re likely to take cues from people who’re playing a different game from them, which can lead to them taking risks they didn’t intend. If you’re a long-term investor and you take your cues from short-term investors, you will probably get burned because they’re playing a different game from you. Figure out what game you’re playing and focus on playing that game. Only take cues from people who are playing the same game as you.
Only you can define what game you’re playing because everyone is different. We have different life experiences and backgrounds. We were taught different lessons about money as kids and we have different risk tolerances. As you approach your investing journey, you need to think about all these factors for your own situation and figure out what’s valuable to you. Think about who you are. What are your personal goals? What are your risk tolerances? What kind of investing strategy fits your personality and your view of the world?
Once you define that, so much of what’s going on around you will be irrelevant to you. In this information age, where we’re bombarded with a lot of stuff left, right and center, filtering out information that is irrelevant to you is absolutely crucial to avoiding distractions and focussing on what’s truly important.
Other people who are just as smart as you might disagree with you but understand that they might be playing a different game from you. They are fine and you are too. As Michael Jordan put it;
“It is who I am. It’s how I played the game. It’s my mentality. If you don’t want to play that way, don’t play that way.” — Michael Jordan, The Last Dance.
No one’s crazy
So many things in life seem to be related to how smart you are, so it is tempting to think that everything is like this. Being intelligent can definitely go a long way in helping you make money, but keeping money has a lot more to do with behaviour than intelligence.
Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know. — Morgan Housel, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
Don’t be too quick to judge when you see people making decisions about money that make no sense to you. We all make decisions about money based on our own personal experience and many other factors.
Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works. Those people can be misinformed. They can have incomplete information. They can be bad at math. They can be persuaded by rotten marketing. They can have no idea what they’re doing. They can misjudge the consequences of their actions. Oh, can they ever. But every financial decision a person makes, makes sense to them in that moment and checks the boxes they need to check. — Morgan Housel, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
When you read this, understand that this is you too. You are misinformed sometimes, you have incomplete information sometimes. So be humble and be kind.
On top of this, we often overrate the impact of the way we think on the way the world works.
You know stuff about money that I don’t, and vice versa. You go through life with different beliefs, goals, and forecasts than I do. That’s not because one of us is smarter than the other, or has better information. It’s because we’ve had different lives shaped by different and equally persuasive experiences. Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works. So equally smart people can disagree about how and why recessions happen, how you should invest your money, what you should prioritize, how much risk you should take, and so on. — Morgan Housel, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
Don’t overestimate the impact of your effort
The outcomes of our lives are guided by more than our individual efforts. Different people call it different things; luck, divine intervention, etc. Whatever it is to you, there is a limit that your efforts carry you past beyond which you’re carried by forces beyond you. Morgan says it’s luck, so I’ll stick with that.
The impact of luck in our success is often far much higher than we’re willing to accept.
When judging others, attributing success to luck makes you look jealous and mean, even if we know it exists. And when judging yourself, attributing success to luck can be too demoralizing to accept. — Morgan Housel, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
Besides luck, Morgan also talks about its counter-force; risk. You’re just as likely to fall into luck as you are to land on the wrong side of risk. In the book, he talks about how Bill Gates was lucky to have a one in a million chance to be at the right school to set him up for his amazing career. This is paralleled with the story of Kent Evans — one of Bill Gates’ friends — who was just as smart as Bill Gates and had the same opportunities, but he died in an accident that had a one in a million chance of occurring.
The point in raising this is that “Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort.” Sure individual effort matters, but there are people who work harder than everyone else around but still get the short end of the stick and there are people who barely do any work, but good fortune seems to seek them out.
The cover of Forbes magazine does not celebrate poor investors who made good decisions but happened to experience the unfortunate side of risk. But it almost certainly celebrates rich investors who made OK or even reckless decisions and happened to get lucky. Both flipped the same coin that happened to land on a different side. — Morgan Housel, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
And more importantly.
“… realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself. Therefore, focus less on specific individuals and case studies and more on broad patterns. … You’ll get closer to actionable takeaways by looking for broad patterns of success and failure. The more common the pattern, the more applicable it might be to your life.” — Morgan Housel, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness.
Nothing is as good or as bad as it seems. Be more humble about your successes, you’re not invincible. Be more forgiving of your failures as well. They don’t define you.
The line between “inspiringly bold” and “foolishly reckless” can be a millimeter thick and only visible with hindsight. — Morgan Housel, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
Know when you have “enough”
Morgan Housel tells the stories of Rajat Gupta and Bernie Madoff. Two unrelated people who, despite being ridiculously rich, got into unlawful practices like insider trading and creating a pyramid scheme to make even more money and it eventually landed both of them in prison.
Why would someone worth hundreds of millions of dollars be so desperate for more money that they risk everything in pursuit of even more? Housel’s answer is that they haven’t learned to say this is enough. Endlessly wanting more can lead you down a dark path.
If expectations rise with results, there is no logic in striving for more because you’ll feel the same after putting in extra effort. … life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations. — Morgan Housel, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
In response to this, he suggests that the hardest financial skill is getting the goal post to stop moving. To say this is enough.
There is no reason to risk what you have and need for what you don’t have and don’t need. — Morgan Housel, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
Okay, this is getting too long. I hope you found something worth taking away for your own money journey. If you learnt something new, please hit reply and tell me about it. I enjoy hearing from you. If there’s enough interest, I’ll write about what I learn from the rest of the book including my own experiences and thoughts about money.
I also hope you have been motivated to pick up a copy of the book for yourself. It’s really brilliant!!
That’s all I have for you this week. If you like the newsletter, consider sharing it with others on Twitter, WhatsApp or Facebook. Hit the thumbs up or thumbs down below to let me know what you think about the issue.
I hope I’ve given you something to think about this week and I wish you ever-increasing curiosity.
Until next week.
Impactful ideas that challenged my thinking.
I have a lot of interests so I'm always learning all kinds of things, some of which really challenge my thinking. In the Just Reflections newsletter, I'll be sharing with you a summary of the ideas that challenged my thinking recently and hopefully they will challenge yours too and we grow together.
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